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Are low US gas prices jeopardizing the European petrochemical industry?

Since 2005, the global gas energy landscape has been profoundly changed by the emergence of unconventional hydrocarbons. At the beginning of the century, the United States sought to build regasification platforms in order to import LNG in bulk. But today, their energy strategy is completely reversed. Shale gas is the “game changer” in the North American energy scene and makes the United States a world leader in gas production. Its share in the total US gas supply has increased from 1% in 2000 to 8% in 2008, up to 30% today and is expected to represent 45% in 2025 (1) (2).

This radical change in their strategy ensures a low-cost domestic energy which boosts the competitiveness of US chemical and petrochemical industries. Gas is not only a fuel for energy production, but also a basic raw material for the petrochemical industries.

Natural gas: the main cost component of the petrochemical industry

Petrochemical industry, a subsector of organic chemistry, transforms the fossil fuels (oil, natural gas, coal) into several petrochemical intermediates, which themselves are used for the production of different finished products. With over 130 million tons produced annually worldwide, ethylene is the flagship product of this industry. It directly supplies packaging, automotive manufacturing and construction industries as well as a variety of industrial markets and consumer goods for the manufacture of intermediate products such as polyethylene, fibers and other organic chemicals. Because of the importance of its production and the diversity of its derivatives, ethylene is often used as a performance indicator of the petrochemical industry as a whole. Ethylene is produced by steam cracking in furnaces, either from ethane-rich natural gas (USA and Middle East) by pyrolysis or by high temperature cracking, or from naphtha (Europe and Asia). The petrochemicals economy closely depends on the availability and prices of raw materials (natural gas and crude oil). For natural gas-based production, gas is the largest cost item and can represent up to 70% of ethylene final price (2).

Figure 1 : Production steps of petrochemical products from hydrocarbons (gas or oil)

Shale gas revolution has enabled the revival of US petrochemicals

At the dawn of the US shale gas revolution, the gas prices were practically similar around the globe. The United States were envisaging a high LNG import rate to meet their energy needs at an average natural gas price of 9$/MMBtu over the year 2008 (2), while Europe already had a diversified supply strategy in order to reduce its dependence on exporting countries. Following the financial crisis and the shale gas revolution, the global natural gas market has undergone profound changes and reverse dynamics. The US gas market price (Henry Hub spot price) (1) has collapsed between 2008 and 2012 to a record of 2$/MMBtu (3). On the contrary, European prices, strongly correlated with Brent oil prices, slightly increased over the same period to reach a NBP spot price of 9.5$/MMBtu at the end of 2012 (4). Now, gas prices in Europe are about three times higher than in the United States; a gap that is likely to persist until 2020 according to several experts (2), even if a US gas stabilization between 4 and 5$/MMBtu (2) is highly envisaged to cover all the extraction costs.

Figure 2: Gas price evolution in Europe and in the United States between 2004 and 2014

Thank to these gas price falls, the US petrochemical industry is now benefitting from its access to gas energy which is three to four times less expensive than its global and European competitors. The competitive advantage of the American players also extends to the electricity market. Indeed, falling gas prices led to an increasing gas consumption in the country's energy mix at the expense of domestic coal. The natural gas share increase has led to a price stabilization over the first four years followed by a 3% price drop for US companies (2). This double competitive advantage has a direct impact on both prices and sales volume growth in petrochemicals and their derivatives. In the US, ethane prices decreased by 55% between 2008 and 2012. They also fell by 45 % between 2012 and 2013. Taking benefit from this positive momentum, the US chemical industry is planning expansion projects which represent an additional ethylene production capacity of 7 to 10 million tons by 2018, i.e. 35% to 50% of the European demand.

Figure 3 : comparison of gas and electricity prices for industries in the United States and in Europe

The recovery of the US petrochemical industry could turn a deficit of 3 billion dollars into a profit of 20 billion dollars during the next 5-year investment period. Its US GDP contribution amounted to 6.8 billion dollars in 2012 and is expected to reach 51 billion dollars by 2025 (5) (6). This GDP growth should lead to an increased demand for industrials downstream of the petrochemical value chain, but also for American consumers who will be able to buy finished products at lower cost. However, global ethylene production capacities already exceeded demand in 2012 (respectively 149 against 130 million tons (11) (7)). Moreover, ethylene transport costs are high compared to its derivatives such as easily transportable polymer resins. US petrochemical industries therefore opt for a vertically integrated organization. This way, they can cover the entire ethylene processing line and get the best exportation profits by focusing on the sale of derivative products. This industrial momentum would be supported by a global polyethylene demand which is supposed to increase by 16 million tons by 2018 (7). Thanks to this new ethylene management strategy, the total US chemical industry turnover could then increase by 67 billion dollars by 2020 (1).

What are the potential solutions to cope with the current loss of European competitiveness?

Unlike American refinery plants which benefit from low cost of energy, groups producing in Europe have seen their production margins gradually decrease by 66% and their profit become negative. Even though global production and sales of chemicals doubled between 2003 and 2013, the EU market shares fell sharply (9). Despite the chemicals sales growth in Europe over the last ten years (527 billion euros in sales in 2013), the European chemical sector share was about 17% in 2013 while it amounted up to 32% in 1993 (9).

Nevertheless, this US industrial dominance based on ethylene production from natural gas led the Europe chemical activities towards the production of less energy-intensive products with raw materials at lower cost (2). European industries must therefore focus on chemicals derived from naphtha-based ethylene and on high value-added niche markets (10) (11) such as propylene and butadiene[1]. The latter is obtained from naphtha with higher lead than from ethane and European naphtha steam crackers can take advantage of this situation (11).

Moreover, European petrochemical groups are more than ever considering relocation. Like Solvay, BASF and Arkema are planning to settle in the United States in order to maintain their turnovers as much as possible (12). Regarding shale gas exploitation in Europe, there is no consensus among the different European countries. This option is supported by the petrochemical sector in general, including Jean-Pierre Clamadieu, CEO of Solvay and Chairman of the CEFIC[2], who wants access to low cost energy and raw materials. The lack of common European gas strategy is highlighted by the Chemical Industries Union (13). As suggested by the Institut Montaigne, there is a need to set a “non-punitive” energy taxation for European industries. Increasing R&D activities in energy efficiency could benefit to the European petrochemical industry competitiveness. Within the SOLWATT project, Solvay group expects to reduce its energy consumption by 10% by 2020. This would act as a solution to help the group fighting against its North American competitors, who benefit from cheaper prices (14).

References

1. CEFIC.The implications of the shale gas revolution for the European chemical industry. March 15, 2013.

2. Cornot-Gandolphe, Sylvie.The Impact of the Development of Shale Gas in the United States on Europe's Petrochemical Industries. IFRI. 2013.

3. IEA.Energy prices and taxes. 2013, Second quarter.

4. Sia Partners, GRTGaz. Gas in focus. [Online]

5. IHS.America's New Energy Future: The Unconventional Oil and Gas revolution and the US Economy. September 2013.

6. Shale gas, competitiveness and new US chemical industry investment: an analysis based on announced projects. s.l. : American Chemistry Council (ACC), May 2013.